Asset prices, financial amplification and monetary policy: Structural evidence from an identified multivariate GARCH model

Helmut Herwartz and Jan Roestel

Journal of International Financial Markets, Institutions and Money, 2022, vol. 78, issue C

Abstract: We investigate feedback relations among asset prices and financial institutions and identify associated monetary policy effects within a system of US nonfinancial firms, real estate, banks and treasury bonds between January 1997 and April 2019. For this purpose, we propose a novel ‘economic’ identification approach to the contemporaneous modeling of conditionally heteroscedastic financial data. While financial amplification characterizes the relation between real estate and banks during the great financial crisis, such effects have been absent among stocks and financial institutions during the dotcom crisis. Interestingly, policy effects are especially strong during most intense market downturns. Moreover, policy sensitivity of asset prices starts increasing long before the actual burst of the bubble.

Keywords: Narrative identification; Contagion; Volatility models; Monetary policy; Financial crisis (search for similar items in EconPapers)
JEL-codes: C32 C39 E44 G01 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:78:y:2022:i:c:s1042443122000531

DOI: 10.1016/j.intfin.2022.101568

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